Early Warner

  • Date:01 Oct 2007
  • Type:CompanyDirectorMagazine

Professor Bob Baxt details comments from Australia’s judges on how the law should not stifle business’ entrepreneurial spirit.

Another call for entrepreneurialism to be recognised

The editor has heard that there has been some resistance expressed at meetings conducted by officials from the Commonwealth Department of Treasury to the proposal in its Consultation Paper entitled Review of Sanctions in Criminal Law that an extended Business Judgment Rule or a similar defence should be introduced into the Corporations Act (the Act) in place of s 180(2).

This news, if correct, represents a most disappointing development. To stifle the ‘creation’ of an appropriate defence for company directors in these circumstances is against the trend of a number of statements made by judges of our courts, to the effect that the law should not be interpreted in such a way as to dampen the entrepreneurial spirit.

Perhaps the most important of these statements was that of Justice David Ipp (then a member of the Western Australian Supreme Court, now a member of the New South Wales Court of Appeal) some years ago in Vrisakis v Australian Securities Commission (1993) 9 WAR 395 where he stated:

“The mere fact that a director participates in conduct that carries with it a foreseeable risk of harm to the interests of the company will not necessarily mean that he has failed to exercise a reasonable degree of care and diligence in the discharge of his duties. The management and direction of companies involve taking decisions and embarking upon actions which may promise much, on the one hand, but which are, at the same time, fraught with risk on the other. That is inherent in the life of industry and commerce. The legislature undoubtedly did not intend by [the relevant provision – now s 180(1) of the Act] to dampen business enterprise and penalise legitimate but unsuccessful entrepreneurial activity.” (at [449])

His view, as ‘endorsed’ by the members of the majority of the New South Wales Court of Appeal in Daniels Corporation International Pty Ltd v Australian Competition and Consumer Commission (2002) 192 ALR 561, stated that:

“The courts have recognised that directors must be allowed to make business judgements and business decisions in a spirit of enterprise untroubled by the concerns of a conservative investment trustee.” (at [501])

A similar approach was adopted in a number of interesting decisions, in particular that of Chief Justice Peter Young in Edwards v Attorney General (2004) 60 NSWLR 667, where he noted that the purpose of the legislation was to commit “the economy to be advantaged by such entrepreneurial ventures [in] limited liability [companies]”.

Now, Justice McDougall, in a lengthy and far-reaching judgment involving a number of issues surrounding directors’ duties and related matters in Ingot Capital Investments v Macquarie Equity Capital Markets [2007] NSWSC 124, has once again reminded us of the importance of the entrepreneurial spirit. After referring to a number of these earlier cases, he noted in dealing with questions of whether directors should be penalised or not because of certain circumstances (often judged by way of hindsight) that it was necessary to “recognise that in some circumstances it may be appropriate for directors to ‘display entrepreneurial flair and accept commercial risks to produce a sufficient return on the capital invested’, and that the mere foreseeability of harm does not of itself dictate that the question must be answered adversely to the directors in this case. It is necessary to balance risk and reward …” (at [1437])

These are clearly very important issues which should be fully and properly addressed. Treasury must ensure that company directors are given the necessary encouragement to continue to take appropriate and reasonable risks without being penalised if things do not work out quite as well as they had planned when they made their relevant decisions.

Professor Bob Baxt is a partner at Freehills solicitors and chairman of the AICD Law Committee.